There’s been a lot of chatter about possibly seeing a big veterinary services company like NVA or Vetcor go public soon. This talk was all over the place in 2021 when the stock market was booming, but it’s cooled off since mid-2022 as the market softened and interest rates went up.
For some background, there hasn’t been a vet services business on the stock market since Mars bought out VCA in 2017 and took it private. Let’s dive into what IPOs are all about and what they could mean for the vet world.
What is an Initial Public Offering (IPO) and Why ‘Go Public’?
An IPO occurs when a company sells stock or ownership to investors and has the stock traded on a public stock exchange like the NYSE or NASDAQ. This means anyone, individuals or institutions, can buy shares in the company. Going public enables a company to tap into a wider pool of potential investors, and thus financial resources for growth and expansion that wouldn’t be available if it remained private.
The Public vs. Private Veterinary Services Landscape
Currently, the public veterinary market is dominated by companies in diagnostics, pharmaceuticals, and distribution—think big names like IDEXX, Zoetis, Patterson and Elanco (Covetrus used to be in this group but got scooped up by a private equity firm and went private).
But most vet service companies you know are still private, tucked under the wings of private equity or family-owned operations. Major players like NVA, Thrive (once called Pathway), Vector, and PetVet are getting so big that they’re starting to think about going public. There’s more on this below, but here’s the short version: Those companies are worth billions now, and they are getting so large that it’s hard for another private equity firm to buy them. So, the owners will eventually look to cash out or ‘exit’ by selling shares to the public.
The Motivations for Veterinary Services Companies to Go Public
Why do mullti-billion dollar companies like NVA or Vetcor need to raise more capital in the first place? It boils down to how these businesses expand—they grow by acquiring other hospitals.
Here’s how the financials usually play out:
- In 2021, buying a top-quality veterinary practice could cost 12 to 18 times its profits. Today, those valuations are still pretty steep, ranging from 8 to 14 times profits.
- Companies like NVA or Vetcor can usually secure loans amounting to about 6 times the profits of the practice they want to buy.
- To cover the rest (3 to 7 times profits), they need additional funds, which can come from three main sources: a) the cash flow their existing operations generate, b) new equity capital, or c) TopCo equity in the purchasing company offered to the sellers as part of the deal.
Even though these large veterinary businesses bring in strong cash flows, they also have hefty debts to manage, and they need to pay interest on all that debt too. Given their continuous drive to acquire new practices and fuel growth, these companies frequently need to infuse fresh equity into their operations. For instance, JAB, the family office that runs NVA, has been all-in on funding their purchases of Compassion First, and more recently, Ethos and Sage, by putting in more equity.
NVA and similar companies are growing so large that their investors will soon turn to public markets for additional capital. This shift will likely happen once the businesses are financially stable enough to access these markets.
Financial Necessities of Going Public
There comes a point when businesses grow too large for private equity to continue funding them. Consider a hypothetical scenario:
Imagine a veterinary services company with 600 locations, each generating an average revenue of $3.5 million, totaling $2.1 billion in revenue. The company has 21 percent hospital margins and 17 percent margins at the corporate level, resulting in over $350 million in EBITDA. If the company was valued at 20 times EBITDA, their market value would be close to $7 billion dollars.
This begs the question: How does a private equity firm finance a $7 billion veterinary company? Realistically, a firm could borrow around 6 times EBITDA, which would provide $2.1 billion. However, this still leaves a substantial $4.9 billion to be covered by equity. Even with prior owners and management potentially rolling over some equity, the price tag is just too big for a PE firm to afford it. A company of this size would likely need to go public.
On top of that, even the largest private equity funds hold between $20 to $25 billion and usually engage in 10 to 15 deals per fund, so their average investment per deal would be around $2 billion—well short of the $4.9 billion needed in this case.
The bottom line is this: The ability for PE to continue to buy the businesses becomes more challenging as these companies continue to grow. Once the consolidator becomes too big, the current investors of the business will create an alternative to exit their investments: the IPO.
The Current State & Future of Veterinary Services IPOs
News about a potential IPO for NVA began in early to mid-2021. But with ongoing market volatility, it looks like we won’t see an IPO until 2025 or 2026. Stock prices for growth companies took a hit starting in early 2022—thanks to inflation, rate hikes, and the Ukraine war—which makes an IPO a risky move.
The veterinary sector, which boomed in 2020 and 2021, is also finding it tough to keep up that growth. Publicly-traded companies like Zoetis and IDEXX have seen their stock prices drop significantly in 2022 and 2023. Those stock prices have continued to stagnate in 2024. It seems any move towards an IPO won’t happen until the Fed decides to lower interest rates from the current 5% to below 4%. Those rate cuts might not happen until the end of 2024 at the earliest.
The Pros and Cons of Veterinary IPOs
So, is it beneficial for the vet market if these veterinary service businesses go public? Will it boost the valuations of individual practices? The truth is, it’s not that straightforward and it depends on a number of factors.
When veterinary services businesses go public, we get a clearer picture of what the industry’s worth with daily valuations of the public company. If a few consolidators go public, you’ll see different EBITDA multiples and get a sense of how much the biggest names in veterinary services are really valued at. Will the public markets value these consolidators more than what the current, private recapitalizations are valuing them? Or will these companies be valued similarly to the values that PE firms pay for recapitalizations? Only time will tell.
One thing is clear: public market valuations of these big consolidators will set a new standard for how much these businesses are worth, and that’s going to influence what private equity firms are willing to shell out for them.
When more of the larger consolidators going public, expect the number of independent companies to drop. There are already over 35 private equity-backed consolidators, and they haven’t been overly active in buying each other out. NVA’s purchases of Sage and Ethos were one-off deals and there has not been much consolidator-consolidation in 2023/24. Nevertheless, public companies can access capital more easily, which is likely to speed up the consolidation of consolidators. This will reduce the number of solo players in the field.
When Will These IPOs Happen?
When can we expect these IPOs to roll out? It’s hard to pin down the exact timeline, but our team predicts that by 2026, we’ll see two to three veterinary companies go public. That movement will likely trigger a wave of acquisitions among the consolidators, where larger consolidators will snap up smaller ones.
This trend might not be the best news for individual practice owners, especially those running smaller operations. Today, there are a handful of buyers for a $1.5 million, 3-doctor practice. However, as the number of consolidators diminishes and the ones remaining grow bigger, their interest in smaller practices will wane.
Anticipated Changes in the Veterinary Market Landscape
As consolidators expand and become more profitable, they’ll start tapping into the public stock market to raise the capital they need to keep growing. If the global economy levels out, we expect to see these IPOs happening in 2026. These IPOs will change the market as we know it: public consolidators will purchase the smaller players, and we’ll see fewer independent companies around.
Veterinary consolidators, whether private or public, have loads of resources and experience they use when they’re buying practices like yours. We’ve seen too many practice owners try to sell their businesses independently and end up on the losing side of the deal. Don’t let this happen to you. After dedicating years to building your practice, you deserve the best possible outcome. At Ackerman Group, we’re here to ensure you get that. Whether you want to sell today or in five years, there’s no better time than now to start planning. Contact us and let’s get the conversation started.